Question

Q2) There is a 10.80% probability of an average economy and a 89.20% probability of an above average economy. You invest 38.10% of your money in Stock S and 61.90% of your money in Stock T. In an average economy the expected returns for Stock S and Stock T are 6.50% and 9.30%, respectively. In an above average economy the the expected returns for Stock S and T are 35.50% and 13.40%, respectively. What is the expected return for this two stock portfolio? (2 points)

I received the following solutions:

Stock S: E(R)= .357808

Stock T: E(R)= .129572

Portfolio E(R) = .103463

The correct answer was 20.35% or .2035

Please help me figure out where I went wrong.

Answer 1

State of economy	Probability of state of economy (P)	Return on S(x)	Return on T (y)	Px	Py
Average	0.1080	6.5	9.3	0.702	1.0044
Above average	0.8920	35.5	13.4	31.666	11.9528
		Total		32.37	12.96
Expected return for asset S= ∑Px= 32.37%
Expected return for asset T= ∑Py= 12.96%
To find,
Expected return on portfolio consisting of 0.381 in Stock S and 0.619 in Stock T
Expected return on portfolio= Weighted average
	0.381*32.37+0.619*12.96
	20.35% (Required answer)